B7 Climate Policy Recommendations

B7 POLICY RECOMMENDATIONS: CLIMATE POLICY

May 18, 2022

Bundesverband der Deutschen Industrie e. V. (BDI) BDI – Federation of German Industries www.bdi.eu

Ensuring Secure and Affordable Energy Supply The B7 emphasizes the importance of ensuring energy security. G7 countries rely on a constant supply of energy as an indispensable input factor for their economies. Energy carriers stand at the beginning of complex and interdependent value chains that form the basis of the economic well-being of the G7.

Global energy systems have already gone through remarkable transformations in light of ongoing decarbonization efforts throughout the global economy. The Russian invasion of Ukraine illustrates the importance of energy security and diverse energy supply. The B7 acknowledges that technologies and approaches to expand deployment of renewable energy, nuclear power, energy efficiency, transportation electrification, and low-carbon hydrogen are not only important to meeting climate goals, but also contribute to enhanced energy security.

Given the gradual process of the energy transition, energy security needs to be strengthened by diversifying energy supplies from various sources and countries globally. This diversification can also contribute to climate progress.

Necessary infrastructure to support natural gas supply diversification has the potential to be converted to hydrogen and other non-fossil gases in support of the longer-term energy transition. For these reasons, it is important for policymakers to recognize that advancing many climate policy objectives will also contribute to enhanced energy security, and vice versa.

In the face of Russia’s aggressive actions in Ukraine, which disrupt global energy markets, the G7 should act in solidarity to mitigate the fallout for affected countries, e.g. by taking coordinated efforts to facilitate LNG markets.

Cooperation on Climate Ambition In line with their governments’ pledges to advance in achieving the goals of the Paris Agreement, businesses in the G7 countries have strongly increased their efforts to cut emissions. For these industrial transformations to be successful, business efforts must be reinforced by decisive government action.

The B7 strongly supports the idea of aligning climate ambitions amongst the G7 countries. We therefore welcome the further exploration of the “climate club” concept as announced by the German G7 presidency, aiming at the acceleration of the industrial decarbonization while addressing carbon leakage concerns. Given that there is no common definition of a “climate club”, the B7 intends to contribute to a common understanding and point out necessary features of this instrument.

At the commencement of discussion, it is key to highlight that the G7 can only be the starting point of what ought to become an alliance of many more countries that adhere to comparable ambitions on climate protection. Enhancing climate-related trade diplomacy is paramount to limit the likelihood of - and potential harm from - retaliatory measures.

We urge the governments to closely collaborate with the countries of the G20, major emerging economies and beyond.

We also encourage engagement with and collaboration at the World Trade Organization as the G7 further develops the climate club concept, also to avoid potential cases in the dispute settlement mechanism.

It is of greatest importance that a climate club founded by the G7 governments is designed inclusively and cooperatively, i.e. so that it is open to any country. Entry thresholds into such a climate club should therefore be kept

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low in the introductory phase to attract as many countries as possible. At the same time, for the alliance to be of global relevance and of positive impact by addressing carbon leakage concerns in the medium to longer term, it should have a significant level of ambition. This said, the alliance should find a careful balance between openness and climate ambition. The challenges related to the inclusion of developing countries should be met with a stepwise approach towards membership. While initially giving the opportunity to choose between different levels of ambition, the clear aim must be harmonization of ambition levels in the longer term. Additionally, for developing countries wishing to join, technical and financial assistance should be considered (e.g. through climate partnerships). Generally, the focus of this alliance on climate action should highlight the benefits of membership rather than penalizing non-members.

Considering the motivation of carbon border adjustments and climate clubs to reduce carbon leakage risks, the B7 encourages the G7 governments to discuss these two policies in conjunction with one another. Carbon border adjustments amongst climate club members can and must be avoided. Cooperation and building trust between members must be at the forefront; CBAMs should be the last resort.

The B7 acknowledges that currently, pricing carbon is not the means of choice for all B7 countries and potential additional partners. A climate club should therefore allow member countries to initially consider the best policy mix in accordance with their respective circumstances. However, carbon pricing is an essential factor for efficient, costeffective greenhouse gas reductions according to different international organizations and institutions (such as the World Bank, the OECD and the International Energy Agency). Therefore, we urge all G7 governments to aim to introduce carbon pricing (such as an emission trading system, a carbon tax) ideally covering the same sectors and emissions while at the same time, discussing a possible fair global carbon price floor. Aligning carbon pricing efforts would greatly increase the comparability of climate ambitions, which in turn would help to build a climate club. In the meantime, the B7 calls upon the governments of the G7 to work jointly and together with international institutions towards identifying suitable common metrics that allow to compare different climate policy efforts. Achieving significant progress that would render comparing explicit and implicit carbon pricing instruments possible would be very helpful indeed: not only would implementing a climate club become easier but transparency in compliance with international climate agreements could also be advanced. The B7 stands ready to engage in further discussion and analysis regarding key design questions associated with any future climate club, including on issues such as scope, comparability, and administrative and technical details.

Ahead of a potential future global price on carbon, all industrial nations should commit to Paris-aligned short and longterm objectives, specifically to meaningful greenhouse gas emission reductions by 2030, and to net-zero targets by mid-century. Countries must implement the commitments they have made regarding the review of their NDCs by the end of 2022 in line with Article 29 and concerning the fastest possible phase-out of inefficient fossil fuel subsidies in line with Article 36 of the Glasgow Climate Pact at COP26.

Cooperation with Developing Countries through Climate Partnerships Climate change is a global problem and requires global solutions as well as global action.

At COP26 in Glasgow, a new climate partnership model to support South Africa in managing their just energy transition was launched. Together with similar climate partnerships, such as the Asia Energy Transition Initiative (AETI), long-

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term partnerships are appropriate models of support from developed countries for the decarbonization of developing countries. Considering the global dimension of climate change, the B7 urges the G7 to increase their efforts to support developing countries by expanding those partnerships.

These climate partnerships should also have a strong link to a climate club. Support to overcome barriers of entry should be offered to developing countries which today still rely heavily on the consumption of fossil fuels but at the same time wish to join the climate club. Assistance and eventual entry to any climate club should be tied to milestones and policy targets to be reached in cooperation between developed and developing countries. These supportive efforts

by G7 and other developed nations should involve the private sector in the partner countries constructively.

Closer cooperation must crucially include scaling up climate finance for developing countries from developed nations.

The importance and benefits of scaled-up financial support for mitigation and adaption efforts in developing countries was recently very clearly stressed again by the Intergovernmental Panel on Climate Change (IPCC) in their sixth Assessment Report (AR6). In line with the Glasgow Climate Pact, the B7 therefore urges the G7 countries to meet the 100 billion USD goal to support developing countries in meeting their climate goals as soon as possible and to increase climate finance efforts after 2025 at the latest.

Decarbonization of the Industry Sector Low-Carbon Hydrogen As the world strives for decarbonization, huge amounts of low-carbon hydrogen are required. This is especially true for the industries of the G7 countries. The necessary transformation marks a huge challenge for our economies. However, it also comes with enormous opportunities for businesses of the G7 countries along the hydrogen value chain, for example in the production of electrolyzers or fuel cells.

Currently, there are different interpretations of low-carbon hydrogen around the globe. This reflects a significant challenge for producers to address different markets and results in a lower than possible international market liquidity.

As a result, the global hydrogen market ramp-up has been impeded and hampered by inefficiencies. However, now is the time to build up and expand hydrogen infrastructures and supply chains.

Harmonized international requirements could enable a uniform global standardization and certification scheme supporting an accelerated market ramp-up of low-carbon hydrogen. Indeed, uniform criteria for the standardization and certification for low-carbon hydrogen are indispensable to facilitate global trade of hydrogen. Hydrogen will have to become an internationally traded commodity rather than a product for niche applications to make a difference in striving to attain worldwide climate neutrality. While a uniform global standardization and certification scheme for low-carbon hydrogen is of key importance for an efficient global H2 market, it takes time to establish such a scheme. The B7 therefore endorses corresponding efforts. It is important to start immediately to increase the supply of hydrogen and to promote investments to construct infrastructures on both supply and demand side, thus supporting an accelerated market ramp-up of low-carbon hydrogen. Therefore, G7 governments should make further efforts, e.g. at the International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE), to establish a methodology to calculate CO2 emission from each hydrogen process. This will contribute to set up the definition of low-carbon hydrogen and speed up the global hydrogen market ramp-up. The G7 should acknowledge the value of coordinated standardization and certification procedures for low-carbon hydrogen.

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Green Base Materials Similarly, G7 governments must address the unresolved issue of standards and common definitions for green base materials such as green steel, green aluminum and green cement. The G7 governments should collaborate among themselves and with other countries to avoid fragmentation of markets in these materials. Additionally, they should consider appropriate measures (e.g. Green Public Procurement) to boost the establishment of new markets for climatefriendly base materials. This is relevant to global climate action because large-scale roll-out of low-carbon produced goods necessitates creating international lead-markets for green products.

Carbon Capture, Transportation, Utilization and Storage Capture, utilization and storage of CO2 (CCUS) is crucial for the decarbonization of the industry to achieve the goals of the Paris Agreement. Today, carbon capture technologies are the only way to reduce process emissions from industries, such as lime and cement production. Additionally, the latest IPCC Assessment Report (AR6) stresses the importance of carbon dioxide removal by net negative emissions, which are necessary to reduce overall emissions within the atmosphere. For carbon capture and storage technologies, including transportation infrastructure, to be in place by 2030, an international policy framework is essential. In this context, G7 governments must also consider facilitating the establishment of a global market for the storage of carbon.

Growing Momentum for the Circular Economy The B7 urges G7 governments to pursue the common goal of developing a climate-neutral sustainable material management and circular economy into the mainstay of industrial value creation and retention. To achieve this, our economies must prioritize sustainable product design: around 80% of a product’s environmental impacts is determined at the design phase. Design-related dimensions (e.g. durability, reparability, recyclability, reusability, remanufacturability) shall take into account the environmental impacts over the life cycle of a product. Additionally, functioning markets and the use of secondary or post-consumer raw materials in the industry will be key. This will help to prevent disruption of global supply chains as last seen with the COVID-19 pandemic. The international community should strive to avoid shortages in the supply of raw materials and concomitant significant price increases. The B7 asserts that unhealthy resource competition can readily slow down the transformation of the global economy.

This requires a fundamental reorientation of raw materials policy including additional instruments to close material and product cycles; planning and investment security for companies; a coherent, innovation-friendly and secure legal framework, and initiatives to ensure competitiveness. In the mobility sector, for example, electric vehicles heavily rely on battery systems whose production requires myriad strategic raw materials such as lithium and cobalt. To ensure a consistent supply of raw materials and to establish a low emission mobility sector from a life-cycle perspective, use of recycled materials will have to play an important role in the future.

It is advisable that G7 governments understand circular economy activities as climate protection measures. This requires development of defined mechanisms for holistic accounting of CO 2 savings through the circular economy. G7 governments must also consider the climate protection potential of the industrial bioeconomy. Additionally, an international dialogue will be necessary to achieve a common understanding.

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Confronting the Loss of Nature and Biodiversity Biodiversity loss, pollution and climate change are inseparable challenges that must be solved together. Biodiversity and ecosystems will also be a major part of the solution to reach climate mitigation efforts. Nature loss is an important issue to business and the economy; restoring nature must be at the center when building a sustainable future. B7 business federations therefore recognize an important role played by the private sector in managing the impact of our economic activity on the environment but also to deliver technologies to reduce the human footprint.

Business and government working in collaboration will achieve positive outcomes for our natural environment. The B7 welcome the G7 2030 Nature Compact adopted in July 2021. The B7 welcomes the launch of the Task Force on Nature-Related Financial Disclosure. We will provide our input into its work and related initiatives. B7 members insist on the need for a structured dialogue between investors and industrial companies in this respect and expect the TNFD to work in transparent and regionally balanced manner.

This year, the 15th meeting of the Conference of the Parties to the Convention on Biological Diversity (CBD COP15), is where leaders will commit to the post-2020 global biodiversity framework. The B7 encourages governments to expedite the development and update of the National Biodiversity Strategies and Action Plans (NBSAPs) under the Convention for Biodiversity. The COP15 Biodiversity Framework should replace the Aichi targets with a new and more refined set of targets. B7 is committed to working with G7, and other governments in reforming economic policy frameworks to spur the protection and regeneration of environment.

Imprint Bundesverband der Deutschen Industrie e. V. (BDI) BDI – Federation of German Industries Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu German Lobbyregister Number R000534

BDI Document number: D 1580

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